DummySpots.com

The Market Today:

The NDX (and therefore the Qs) formed a “hanging man” candle today. A “classic” hanging man’s high marks the top of an uptrend. Today’s didn’t, but I look at it this way: the market gapped up on the open, then the selling set in and took it way down before it rallied back up to close above the open. So today was the highest close in the uptrend, at least. Ergo, hangie manie.

What to do? Well, for sure, don’t try to predict the future. Ever. Review your stops, make sure they’re at a point where you’d be comfortable being taken out. Watch for a confirmation of the hanging man. Confirmation would be a gap open below today’s open (i.e. below the “real body” of today’s candle) if you’re aggressive– that would be a nice daytrade setup to watch for a Dummy Spot short entry. If you’re less aggressive, confirmation would be a close below today’s low. Remember, though, this is still an overall uptrend, so shorting on a swing trade (daily-bar) timeframe would be very dangerous. Better to use a confirmation as an opportunity to take some of those massive profits where you’ve been long for the last three weeks.

I’ve been trying to keep these continuing trades over in the sidebar so I don’t put you to sleep with so much hot air. Latest JOYG trade still here in “the middle of the page” for now, as it’s late and I’m really tired.

I feel like this trade is winding down. Joy Global broke upwards beautifully, and I happened to be standing by the tracks when the train pulled away. Now, short of a “geopolitical event,” we’re due to roll over and head back for that second bottom. I’m not calling a top and jumping out because… well, you know because why. But I am moving my stop up nice and tight, under today’s low of 36.19.

As if I needed any more spotlights and bullhorns screaming SETUP!! on Newmont Mining. You know from yesterday about the high-volume hammer. Now what did today do? We all know and love the nr7 bar. Today was the narrowest range since 11/25/05, so I’m pronouncing it an “nr200“.

As always, watch for the break, grasshoppa, watch for the break.

How about one more setup before bedtime? (Sorry for no Dummy Spot daytrades, I’ve kinda been at work).

I had written extensively in a post last July how Canwest Petroleum (CWPC at the time, now trading under its new purty Amex ticker of BQI) had diverged with the oil market as it broke below 6.00. Now we’ve been trolling around between 3.50 and 4.00 for some time, and it’s formed one of those nice little break-and-pullback setups:

The entries and stops on these setups are so clear, well, a dummy could spot ‘em. Let’s watch…

Everybody is happy. Gas is cheap. Oil stocks? All sucking wind, of course. Major breakdown from long-term uptrend. Or is it?
(Me, in my post 13 days ago)

Oil experienced the largest percentage gain today since March. News headlines announce that this is “defying expectations“. Really? Whose expectations? I’ll tell you whose. THEY. They talk a lot, don’t they? Problem is, if you listen to THEY, you will always be trading behind the curve, a day late and a dollar short.

Ignore THEY. Listen to YOU. Can you think for yourself? Can you see for yourself? Do you trust your own judgement? Then turn the TV down, turn the news headlines off, and Trade That Damned Chart!

Here’s the most recent trade I’ve written about, a bottom reversal I was fortunate enough to catch on JOYG two days ago:

My stop is just trailing along, only at 33.50 so far. I don’t know how long this little run will last. I’d expect a retest of that bottom pretty quickly, but I could be wrong. That’s what stops are for– for those of us who can’t predict the future, and so don’t try. We leave that to THEY.

Another out-of-favor commodity, and its stocks, caught my eye today. Gold popped back above $600 an ounce. What did THEY SAY about Newmont Mining? The headlines are Newmont sees lower gold sales in 2006, 2007 and Newmont Mining Shares Sink to Year Low. Sounds rough, no? But gold turned up, and look at the chart:

If you read much of my mumbling, you’ll know I place great importance on high-volume days, particularly after an extended move. Newmont fell below its 52-week low today, then climbed back on massive volume, printing a nice hammer with its tail hanging down in the netherworld. A hammer like that can serve as a one-bar trade setup.

Oh, and I should mention that I’m not exactly a gold bug, but I do view gold prices more as changes in the value of the dollars than in the value of the metal. Maybe I’m a currency bug. Or, maybe I’m just crazy.

Am I saying you should get long NEM? Nope, unless YOU see something. Never listen to what I say. After all, to you, I’m just part of THEY.

How about that! S&P solidly crosses 1326 (finally). The Qs have 40 in the rear-view mirror. Sweeet!! Check out The Market Today:

Yesterday afternoon, as I was working on the Krebs Cycle-looking chart for my currency rant, I noticed the oil stocks all showing some serious intraday reversals. Some had gapped down and reversed into the gap. Some had just flipped. But they all headed up like gangbusters after oil came back above $60/barrel. This type of intraday action results in a hammer on the daily chart, and virtually all the oil stocks made one. The OIH didn’t quite form a textbook hammer, but the action was the same:

I scrolled thru a few of the ones I regularly follow, looking for a more volatile one to get long on. I was going back and forth between UPL and JOYG, and finally settled on JOYG. It formed a near- Dummy Spot, and I had a bit of an itchy trigger finger, so I got long with a smaller than normal position size, and set my initial stop below the day’s low.

Now, the normal way to play this trade would be to wait for the next day’s break of the hammer bottom. That happend emphatically this morning:

However, since I saw the hammer clearly forming, and there was no danger of a re-reversal, I went ahead and got in a little early. This is a bit more risky, hence the smaller position size. This time, it worked out nicely.

This is a trade which will require a tight trailing stop. Why? If this is just a pullback into a downtrend(I don’t think it is), it’ll fail within a few days. If it’s the end of the preceding downtrend, this will be the first bottom, in which case it may run a little more, but will come back (any Fibonnaci fans out there?). If that happens, I’ll let this trade get stopped, then get long on a resumption of the new uptrend, with an appropriate stop and position size.

I would be remiss if I didn’t mention my recent nemesis Apple Computer:

I was watching for a break of 76 as a point to get long and set a tight stop. Always a tight stop. Instead it gapped up and ran. Can’t chase it, stop would be too wide. Ah, well, I’ll revisit AAPL soon enough. And for the record, I’ve decided my wishful short of Apple was a break of Rule 8. Breaking our own rules is a bitch, no?

As promised, I’ve worked out my Photoshop doodle showing how the Chinese and Japanese governments have “intervened” to keep their currencies- and therefore their products- cheap for us prodigal spendthrifts in the U.S. Their actions have served as a secondary National Bank to our economy (our Federal Reserve being the primary one), flooding the dollars we send them right back into circulation over here at virtually the same value as when we sent those dollars overseas (the repatriated dollars would normally be weaker).

Their actions also help to explain the seemingly paradoxical fact of our Treasury yields remaining low as the Fed raised the Funds Rate from 1.00% to 5.25%. As the foreign governments have used the dollars we send them to purchase U.S. Treasuries, they have created an exaggerated demand for those Treasuries, thus inflating the price and depressing the yield.

The first image is of the “normal” (if somewhat simplified) flow of goods and money internationally and how the free market adjusts currency rates to maintain a balance. Click unless you’ve got a magnifying glass:

The second image is of how the Chinese manage to prevent their currency from appreciating and our dollar from falling by buying U.S. bonds instead of exchanging the dollars for yuan (the Japanese government do the same with the yen):

Why do I think this is important? Because at any point the governments of China and Japan could decide to reduce the rate at which they purchase our Treasuries or, God forbid, actually start selling those Treasuries rather than accumulating them.

What would happen then is a rapid devaluation of the U.S. dollar, and a skyrocketing bond yield at the same time. If our economy were anything less than rock solid, we could see an uprecedented economic collapse, and our Fed only has a few points of room to “ease” and try to add liquidity.

How rock solid is our economy? Look at the rate of inflation brought on by our tepid economic growth. We’ve killed it with a Funds rate of only 5.25%. Look at the bond yields. Inverted, and yes it does matter. Look at REAL ESTATE! Home sales falling with 30-year mortgage rates below 6%!! What would happen if mortgage rates went to 12% in a matter of a couple of years?

I’m concerned. That’s why I keep hoping for these PPI and CPI numbers to show some more impressive growth. I’m afraid this big 747 is trying to stall on us.

In The Market Today, our old friend S&P 1326 is back again.

The range of today’s bar encompassed virtually every bar for the past 8 trading days. Perhaps the managers are putting on the window dressing during this last week of the quarter. Who knows. We shall just trade the chart.

The Qs opened higher, dropped, then rallied strongly back above the important 40 level. Like the S&P, they’re still mired in a sideways range around a major support/resistance level.

Much to my chagrin, AAPL participated wholeheartedly in today’s NDX action.

It gapped up on the open, and quickly hit my stop above Friday’s high. However, it then fell back into the opening range, coming within 8 cents of an opening gap reversal (and an opportunity to short for an intraday trade). I actually had a stop limit order to short at 73.71 (just below the OR low) which wasn’t hit. Upshot? I’m out, and will watch the recent range of approx. 72.50-76.00 for a break.

Added a new post to Da Rules! Check out Rule 7: When To Average Down. Of course, we already know when, don’t we?

I’m off from the ICK! regular job tomorrow, and so will be shooting for a little day trading. As the market’s in a pullback right now, and many participants are on hold until next week (i.e. next quarter), we may not be able to take advantage of much excitement. We’ll know in about 12 hours.

I’m a big fan of currencies. I’ve followed currencies actively for about four years now (as opposed to 20 or so years for stocks). I’ve never traded currencies– I’m much too small of a fish, as I see it. But I believe the currency markets often hold the missing piece to the puzzle of how all this economic activity adds up on a global scale, and they often can show us a clearer picture of where our consumption habits and the policies of our government are taking us than we’ll ever see on TV or read in the news.

To get an idea of the scale of the currency markets, I did a little impromptu research to find some current numbers. Right now the NYSE and NASDAQ combined account for about 105 billion dollars in trades each day. This figure is dwarfed by trading in the Treasury market. Bonds and their siblings account for approximately 900 billion dollars’ worth of trades daily.

This leads to the currency market. It’s known as the Foreign Exchange Market, or Forex for short, and accounts for nearly 2 TRILLION dollars in trades every day!!

Free markets are one of the greatest miracles of modern life. They allow us to trade our skills and labor for currency, then to trade that currency for the things we need and want, even if those things are created by the cooperative efforts of thousands of different people all over the world who don’t know or necessarily even like each other.

Free markets work brilliantly, creating the most efficient pricing and the most efficient flow of the current supply to fill the current demand. The problems arise when someone meddles. This someone is usually a government.

Our government’s meddling… er, intervention began in earnest after the Great Depression, always with the best of intentions, and with some success along the way, but at the price of the greatest economic tragedy in our history- the unfunded entitlement programs which, without draconian reforms, are destined to crush our economy and our childrens’ future.

When a government meddles with the currency market, the results can have severe global repercussions. For years now the Chinese and Japanese governments have meddled, in order to keep their currencies weak relative to ours. This has allowed their trade surplus with us (i.e. our trade deficits with them) to continue to expand when a free market would have checked that expansion through the escalation of the price of their products we demand and the (gradual) devaluation of the dollars which we supply.

This artificial sale on their goods has happened at the worst possible time… the period when our own Federal Reserve was flooding our market with dollars like a pusher floods the youngsters with free drugs, to get us addicted to spending and to encourage us to continually expand our habit, ostensibly for the “good” of the nation. (I’ll leave alone the question of whether the pushers had any political motivation).

As I state from time to time in an article or rant or when I just feel like dragging out my soapbox, our economy should not be teetering between slow growth and stagnation right now- it should be growing at a record-breaking rate with the Fed desperately trying to reign it in. The fact that we’re just drifting after so much “throttle” over the last few years is disturbing.

I’m working on a graphical representation of how the Chinese government in particular has interfered with the Free Market to try and maintain a competitive advantage. Right now I’m waffling between a doodle on Photoshop and just scanning my hand drawings.

When I post the drawing, I’ll continue with this topic, and particularly with my concerns over how the Chinese and Japanese may be forced to reduce the rate at which they are adding liquidity to our markets by buying U.S. Treasuries, at precisely the moment when our economy is stalling and going into the recession delayed, and intensified, by our Fed’s excessive intervention at the beginning of this century.

From David Silverman’s excellent article A Day Trader Looks Back on the Day Trading Revolution:

I remember one thing I heard someone say during my long-ago visit to the Broadway arcade: that the best day traders are the ones who sit in front of their screens all day and “eat the glass.” This struck me as a perfect description of what one needs to be willing to do in order to achieve success in the markets. It isn’t easy. It can be bloody and painful, and those tiny shards get caught between your teeth, but if you really want to make it, you need to eat the glass with every trade.

The Market Today:

Beginning of a downtrend from major resistance, or a nice little pullback into an uptrend? The weakening volume says pullback. The price says “ho-hum.” No trade entry here. I’d be inclined to go long on a resumption of the uptrend, though.

I admit it. Based on my previous evaluation of Apple, I got short on its failed breakout. We’ll see if my daughter’s “uncoolness” downgrade was correct. This one isn’t a classic setup… I just felt like I owed it to her after she and all the other teenyboppers were so disappointed by Jobs and his “lame-o” announcement (i.e. no cool new cell phone plus Ipod).

Oil shows bottom! No… oil breaks down! No… breakdown fails, long setup imminent.

Yada, yada, yada. We’ll know as soon as this damned range breaks. I still think it’s some extended bottoming action, but I could be wrong.

Update on current Cisco trade: Stopped for a final gain of “2.9R“. Read the whole story here.